In the first weeks of May this year, the European Commission announced a proposal for a Directive on Bank Accounts that will focus on three areas:

– comparability of bank account fees: the aim is to make it easier for consumers to compare the fees charged for bank accounts by banks and other payment service providers within the EU;

– bank account switching: the purpose is to establish a simple and quick procedure for consumers who wish to change from their current bank account to a different one, with the same or a different bank or other financial institution;

– universal access to bank accounts: the aim is to allow all EU consumers, irrespective of their country of residence or financial situation, to open a payment account, which allows them to perform essential operations.

This proposal from the Commission is in line with a pro-active policy towards the financial sector in which regulation is imposed when the market situation is deemed insufficiently consumer-friendly. Previous examples of this policy include Regulation 2560 (on fees) that motivated banks to speed up the processing of cross-border payments within Europe. Although the banking sector has responded with initiatives to improve its operations, the European Commission and the European Parliament are continuing to regard these efforts as being inadequate, and are consequently imposing even more Recommendations and Regulations.

Why the rush?

While we should not oppose the need for further regulation, the justification for the enhanced regulation imposed by the Commission seems to be more akin to oversight than to credibility. The Commission is not reluctant to state that the disclosure requirements of the Payment Services Directive (PSD) have had insufficient effects, and thus proposes websites for comparing fees for banking services.

This hasty procedure is remarkable. The results of the evaluation research of the PSD are ready since the beginning of this year, but the Commission has postponed publication and decided to first push the Directive on Bank Accounts forward in the political process. This doesn’t make sense. The proper and slower procedure would be to first discuss the outcome of the PSD-evaluation and then determine the precise follow up in terms of regulation. The current rush thus creates the impression that the evaluation results provide insufficient support for the regulatory interventions that are proposed in this Bank Account Directive.

Turning a blind eye to the non-credit institutions

At face value, the goals of the Commission in relation to this Directive seem to be laudable. And in theory, as a result of EU initiatives and rules on ‘better regulation’, a rigid cost-benefit analysis would be provided by the Commission before proceeding with further regulation. However, in the previous phases of the discussion on the costs and benefits of switching bank accounts, the Commission has, at some point, conveniently ‘overlooked’ these rules.[i]

With the current proposal, the required impact assessment looks quite robust, however it tells an interesting story. The Commission had to rewrite the proposal before it could be approved by the impact assessment board. Much of this rewrite related to the narrow-minded approach of the Commission to only focus on credit institutions. The Commission has turned a blind eye to discussing the impact on the rest of the market (payment service providers, e-money issuers), while still formally obliging them to offer similar services (direct debits) as credit institutions. This looks like an analytical and legal flaw.

Another flaw in the proposal is the ‘fast-forward’ reasoning leading to the norm that unless everyone in Europe switches bank accounts quite a lot, the market is evidently failing and regulation is necessary. In doing so, the Commission is making an analytical mistake: it forgets that payment services are a derived good, often with lower prices than the primary goods that are also part of the total consumer budget. For rational consumers, it simply doesn’t pay off to spend a lot of time checking and comparing bank websites to save 10 to 50 euro per year when that same time could be used to negotiate and compare prices for the purchase of a 400 to 500 euro smartphone, cheaper electricity provision or a lower interest rate on a mortgage. What happens in practice is that consumers only reconsider the choice of their bank accounts at specific lifecycle events such as moving to another house, getting married or divorces, the birth of a child.

Given that the analysis misses out on the most relevant parts of the newly-formed market of alternative payment providers, the Commission is missing important developments on both the supply-side and demand-side of the market for payment instruments and services. As a result, definite conclusions may not be drawn from the tentative data that the Commission has provided.

A Directive is certainly the wrong tool

In view of the current status of the legislation: it is hard to imagine that the proposed Directive will be withdrawn or significantly modified. And with the European elections coming up next year, it is also clear that European MPs may well want to adopt this consumer friendly piece of legislation. Still, the Commission could have done its homework a bit better. If indeed, the provision of bank accounts across the EU is a concern, then it would have been better to choose the Universal Services Obligation (USO) as the regulatory mechanism.

We have already used this mechanism in Europe, to oblige national telephone companies to provide the public with a certain minimum number of public telephones that are available within a reasonable distance of homes. Moreover, the following quote taken from a

‘Furthermore, designating all banks to take care of the product dimension of a Universal Services Obligation (e.g., consisting of only a basic bank account service) may be the most effective way of implementing it, provided that the USO has a minimal scope.’

This report also states that one needs to determine whether or not a Universal Services Obligation is required for each geographical area:

‘However, with regard to the geographical dimension of a USO, designating all banks leads to unnecessary cost duplication, so that it is worthwhile to consider other options, such as self-regulation and a franchising mechanism in combination with an auction. [… .]

Costly and ineffective proposal

I think that the citizens of Europe would welcome a government body that only regulates when the facts are evident and the tools of regulation are properly geared to the problem at hand. However, we still have a long way to go with regard to this Directive on Bank Accounts. It is an ivory tower proposal that is based on incomplete data and an incomplete analysis of available and proportionate regulatory tools. If these flaws are not corrected during the upcoming discussions in the European Parliament, we will be heading towards a costly layer of EU-wide regulation that is inspired by emotions rather than facts.

Simon Lelieveldt is an Industrial Engineer, who has worked as a supervisor, banker and policymaker in the areas of payments, electronic money and bank supervision. He is a banking and regulatory consultant and a former member of the EU expert group on user mobility in bank accounts.

[i] In June 2007, the expert group on customer mobility in relation to bank accounts published its report for further consultation with European stakeholders. The views in the Group as to the existence of a problem and market data diverged significantly. A consultation on the report and impact assessment were planned to determine if and which problem would exist and what policy measures would be justified. Before this roadmap could be executed however, the Commission had already decided that there was a problem and unilaterally made better bank switching a part of the EU Agenda for the Single Market.

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